Fragile Europe Weakens U.S. Push for Russia Sanctions

Po-Russian activists hold shields signed "Obama hands off Ukraine" and "Down with US and EU" as they guard a barricade outside the secret service building in the eastern Ukrainian city of Lugansk on April 12, 2014. Photographer: Genya Savilov/AFP/Getty Images

April 15 (Bloomberg) -- The U.S. readiness to impose new
economic sanctions on Russia over Ukraine is offset by the
European Union’s reluctance to introduce stronger measures that
could threaten its already fragile economic recovery.

While the Obama administration said yesterday that it’s
prepared to ramp up sanctions, possibly to target specific
sectors of the Russian economy such as financial services and
energy, the EU limited its decision to expanding an existing
list of individuals under asset freezes and travel bans.

U.S. officials concede that squeezing Russia’s economy is
the only realistic weapon the U.S. and its European allies have
to respond to the clashes between pro-Russian separatists and
Ukrainian authorities. Without European support, though, U.S.
sanctions will have little effect on Russian President Vladimir
Putin’s ambitions in Ukraine, said Simon Mandel, vice president
for emerging Europe equity sales at Auerbach Grayson & Co.

“The level of trade between the U.S. and Russia directly
is quite limited,” Mandel said in a phone interview. “Whatever
sanctions the U.S. comes out with, unless the Chinese government
or the EU are willing to support them, they will still have a
minimal impact on the Russian government.”

“It will have a meaningful impact in terms of the
perception, and that will, I think, come as a detriment to the
market generally,” said Mandel, who’s based in New York. “But
in some of the fundamental impact, I think that would be quite
limited.”

EU Meeting

EU foreign ministers agreed yesterday in Luxembourg to add
new names to a list of people facing sanctions following Putin’s
annexation of Crimea last month.

A wider EU blacklist may hit “other entities” deemed to
be involved in destabilizing Ukraine in addition to individuals,
Irish Deputy Prime Minister Eamon Gilmore said. EU leaders may
meet next week to decide on new sanctions against Russia,
according to French Foreign Minister Laurent Fabius.

The U.S. is weighing further measures under executive
orders signed by U.S. President Barack Obama to “allow for all
kinds of different sanctions,” White House Press Secretary Jay
Carney told reporters in Washington yesterday before a call
between the American and Russian presidents.

Energy, Mining

The administration is considering measures targeting
individuals, as well as “certain sectors of the Russian economy
such as financial services, energy, metals and mining,
engineering and defense,” U.S. State Department spokeswoman Jen
Psaki said yesterday.

Any meaningful sanctions by the U.S. “over the long-term
would be lining up the European allies at a very fragile time
for some very significant economic risk of their own,” said
Sean Kay, a professor of international relations at Ohio
Wesleyan University who specializes in Europe.

“They have signaled strongly that they don’t want to have
to go down a further road of sanctions, but if Russia were to
take overt actions in eastern Ukraine, they’d be prepared to do
that,” Kay said in a phone interview.

Russia is vulnerable to economic pressure, data compiled by
Bloomberg indicate. More than half the revenue of the 50 firms
that make up the benchmark Micex stock index comes from outside
Russia -- almost 56 percent, compared with slightly less than
half five years ago.

Lukoil’s Revenue

Energy giant OAO Lukoil, the No. 4 company on the Micex top
50 list, gets more than 81 percent of its revenue from foreign
sources. The Moscow-based company produces more than 16 percent
of Russia’s oil, almost 17 percent of its oil refining and paid
the Russian government $39.3 billion in taxes in 2012.

Even so, investors have deposited $721 million in Russia-focused exchange-traded funds since early March, according to
data compiled by Bloomberg.

Still, doubts now may be taking root amid the continuing
unrest and the threat of additional sanctions: The ruble
declined to a three-week low yesterday, the Micex retreated 1.3
percent and Brent crude oil advanced to a five-week high.

The EU already has blacklisted 51 Russian and Ukrainian
political and military figures. Its challenge now is how to
inflict stiffer punishments without harming Europe’s economy,
such as by provoking Russia to cut off gas and oil deliveries.

U.K. Prime Minister David Cameron discussed Ukraine
yesterday with German Chancellor Angela Merkel, and the two
agreed that the EU foreign ministers should discuss “how work
on potential further sanctions can be accelerated,” Cameron’s
spokesman, Jean-Christophe Gray, told reporters in London.

EU Divided

While the German government has been coordinating the next
phase of sanctions behind the scenes, there’s growing dissent
among EU governments about the nature of additional sanctions
and when they should be imposed, said a high-ranking German
official who asked not to be named, citing government policy.

Lithuanian Foreign Minister Linas Linkevicius urged
striking at Russia’s banking and financial system, tactics the
U.S. and EU have used to isolate Iran over its suspected nuclear
weapons program. In the Ukraine crisis, the U.S. already has
sanctioned St. Petersburg-based Bank Rossiya, owned by close
associates of Putin.

Linkevicius voiced frustration with the consensus-based
decision-making that forces the 28-nation EU to move at the pace
of its slowest member. “We shouldn’t focus too much on washing
dishes when the house is on fire,” he said.

Countries farther from the EU’s eastern borders are in less
of a hurry than those such as Lithuania and Poland that were
under Soviet domination for five decades. Greek Finance Minister
Evangelos Venizelos called for diplomacy, and Luxembourg Foreign
Minister Jean Asselborn said Russia has sanctioned itself,
citing the ruble’s drop and jitters among foreign investors.

“The serious risk for Russia in that is that the oligarchs
will feel pain, its economy would feel pain and crucially they
would lose the vital gas sales they need to sustain their
economy and financing of their debt,” said Kay, the Ohio
Wesleyan professor.

Camouflaged Gunmen

“There are a lot of incentives to see this de-escalate,
but the danger is that there could be an inadvertent escalation
of danger or crisis that causes miscalculations,” Kay said.

“The best thing that can be done right now is some
significant diplomatic engagements that would try to find off-ramps, that would both reassure Ukraine about its sovereignty
and also find innovative ways or creative ways to make sure that
the Russians in eastern Ukraine are also satisfied with the
existing state of affairs,” Kay said.

EU foreign-policy chief Catherine Ashton said after the
meeting in Luxembourg yesterday that she’ll attend an April 17
meeting in Geneva with diplomats from Ukraine, Russia and the
U.S to seek a diplomatic solution to the crisis.

Ashton said the point of the Geneva meeting -- shadowed by
speculation that Russian Foreign Minister Sergei Lavrov may not
appear -- is “to begin the conversation about how do we de-escalate the situation.”